ASSESSMENT OF TAX COLLECTION PROBLEMS ON BUSINESS

(A CASE STUDY ON SOKORU WOREDA)

A RESEARCH SUBMITTED TO THE DEPARTMENT OF BUSINESS MANAGEMENT

IN PARTIAL FUILFILLMENT OF THE REQUIREMENT FOR BACHELOR DEGREE
OF ART (BA) IN BUSINESS MANAGEMENT

PREPARED BY:

1. AYENEW SEWNET ID NO: BA:BMGT-11/06-18

2. BEKALU DERSEH ID NO: BA:BMGT-11/06-59
3. DEBELE MAJOR ID NO: BA:BMGT-11/06-27
4. EYOB WORKINEH ID NO: BA:BMGT-11/06-49
5. GEMECHU MITIKU ID NO: BA:BMGT-11/06-48

ADMAS UNIVERSITY
COLLEGE OF DISTANCE EDUCATION

NOVEMBER 2021

BISHOFTU ETHIOPIA
 ACKNOWLEDGMENTS

First our special thanks go to the almighty GOD for his undeserved support. And
secondly, we would like to thank our family for their great support us include all payment
without boredom until finally and technical advice and our unfinished special
appreciation for Ato Yonatal Habtamu for his guiding us on this research success.

Finally, we would like to thank the manager of sokoru woreda for giving us full
information about tax collection.

I
 ABSTRACT

This study focused on problems related with tax collection in sokoru woreda it is known
that the existence of state without tax is unthinkable because, government raises fund
from tax collection. So, studies of problems associated with tax collection and finding
appropriate solution may help to contend with development constraints success fully
through detailed investigation, because of this, this study designed and looked at the
problems related with tax collection. In sokoru woreda. With the key objective of
assessing problems related with tax collection. This may help the woredas revenue and
tax office to look at originated problems.

II
 TABLE OF CONTENTS

ACKNOWLEDGMENTS ----------------------------------------------------------------------- Ⅰ

ABSTRACT --------------------------------------------------------------------------------------- Ⅱ

TABLE OF CONTENTS ----------------------------------------------------------------------- Ⅲ

LIST OF TABLE --------------------------------------------------------------------------------- Ⅴ

LIST OF FIGURE -------------------------------------------------------------------------------- Ⅵ

CHAPTER ONE

1. INTRODUCTION ----------------------------------------------------------------------- 1

1.1 Back Ground of The Study ----------------------------------------------------- 1

1.2 Statement of The Problem ------------------------------------------------------ 2

1.3 Objectives of The Study --------------------------------------------------------- 3

1.3.1 General Objective ------------------------------------------------------- 3

1.3.2 Specific Objectives ----------------------------------------------------- 3

1.4 Significance of The Study ------------------------------------------------------ 3

1.5 Scope and Limitation of The Study ------------------------------------------- 4

1.6 Organization of The Paper ------------------------------------------------------ 4

1.7 Limitation of The Study --------------------------------------------------------- 4

CHAPTER TWO

2. LITERATURE REVIEW ---------------------------------------------------------------- 5

2.1 Introduction ----------------------------------------------------------------------- 5

2.2 Role of Taxation in Development Strategy ---------------------------------- 6

2.3 Characters of Good Tax System ----------------------------------------------- 7

2.4 Taxation Principles -------------------------------------------------------------- 8

III
 2.5 Canons of Taxation ---------------------------------------------------------------- 9

2.6 Major Types of Taxes in Ethiopia ----------------------------------------------- 12

2.7 Classification of Taxes Based on Their Effect on Income ------------------- 16

2.7.1 Progressive Taxes --------------------------------------------------------- 16

2.7.2 Proportional Taxes -------------------------------------------------------- 16

2.7.3 Regressive Taxes ---------------------------------------------------------- 17

2.8 Categories of Tax Payers ---------------------------------------------------------- 18

2.9 Procedures of Tax Collection ----------------------------------------------------- 19

CHAPTER THREE

3. Research Design and Methodology ------------------------------------------------------- 20

3.1 Research Design -------------------------------------------------------------------- 20

3.2 Source of Data and Collection Method ------------------------------------------ 20

3.3 Target Population and Sampling Methods -------------------------------------- 20

3.4 Data analysis Method and Presentation ----------------------------------------- 21

CHAPTER FOUR

4. Data analysis, Interpretation and Presentation ------------------------------------------ 22

4.1 Analysis of Data Gathered from Tax payers ----------------------------------- 22

4.2 Analysis of Data Gathered from Employees ----------------------------------- 27

4.3 Analysis and Presentation of Secondary Data --------------------------------- 31

CHAPTER FIVE

5. Summary, Conclusion and Recommendation ------------------------------------------ 33

5.1 Summary --------------------------------------------------------------------------- 33

5.2 Conclusion ------------------------------------------------------------------------- 34

5.3 Recommendation ----------------------------------------------------------------- 34

REFERENCES

IV
 LIST OF TABLE
Table 1 General Profile of tax Payers ------------------------------------------------------------- 22

Table 2 Types of tax payers take parts in responding the questionnaires -------------------- 23

Table 3 Do you face any problem when you pay your tax liability? ------------------------- 23

Table 4 Is your annual tax liability based on your income? ----------------------------------- 24

Table 5 When do you pay tax? -------------------------------------------------------------------- 24

Table 6 Does the tax rate imposed by government is fair? ------------------------------------ 24

Table 7 Is the payment period enough? ---------------------------------------------------------- 25

Table 8 Do you know why tax is compulsory? ------------------------------------------------- 25

Table 9 How do you see present taxation system? --------------------------------------------- 26

Table 10 How do you feel about taxation? ------------------------------------------------------ 26

Table 11 Are you satisfied with the method of assessment? --------------------------------- 27

Table 12 General profile of the employees ----------------------------------------------------- 27

Table 13 Do most tax payer pay their tax liability on time ---------------------------------- 28

Table 14 How you evaluate the coordination of your office with others ------------------ 28

Table 16 How you evaluate the knowledge of tax payer about taxation ------------------- 29

Table 17 What do you feel about the position you have assigned? ------------------------- 30

Table 18 What is your idea about present tax collection and Assessment system? ------- 30

Table 19 The five years budgeted and actual amount of tax collected in sokoru woreda -- 31

V
 LIST OF FIGURE

Figure 2.1: The relationship between tax rates and tax base -------------------------- 18

VI
CHAPTER ONE

1. INTRODUCTION
1.1. BACK GROUND OF THE STUDY

Typically, taxes are the primary source of government revenues. Taxation policies
depend of the socio economic and political structure of a country. In Ethiopia though
taxation came into being with the emergence of state and government, but there is no
reliable documentary evidence exists as to when exactly taxation was introduced.

In the 15th century written stories of Ate Ezra Yacob indicates that taxation was
introduced previously in Ethiopia. In these eras tax was paid by different social groups to
government, feudal lords and priests. Besides, these documents approve that Ate Zara
Yacob had for the first-time enacted regulation can be taken as an evidence for the
presence of taxation system before and on Zara Yacob government.

In general, a kind of traditional tax system was practiced on those days this traditional tax
system was expresses in two forms of payment in kind and unstructured tax system. In
traditional tax system, much burden was laid on farmers. Though such burden was tried
to lessen by emperor Tewodros's government, strong change had been taken place by
emperor Menelik.

Toward the end of the Imperial period the majority of the population living at subsistence
level. There was limited opportunity to increase taxes on personal or agricultural income.
Consequently, the imperial government relied on individual taxes (customs, excise and
sales to generate revenue for instance in the early 1970s taxes on foreign trade accounts
for close to 2/5th of the tax revenue, and one third of all government revenues. At the
same time, direct taxes accounted for less than one third of tax revenue. During the
“Dergue” regime the taxes were similar to those imposed during Haileseassie regime
except that wider tax base and increased tax rates.

The “Dergue” regime partially alleviated the tax collection problems that existed during
the imperial period by delegating the responsibility for collecting the fee and tax on
agriculture to peasant association which received a small percentage of revenue as
payments.
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The main purpose of generating revenue from various sources is to finance public
expenditures. The governments generate are revenue from tax and other non-sustainable
sources. The collection of money from available sources of revenue by government needs
the availability of democratic government, foreign and domestic creditors and donors,
efficient tax system and awareness of the society regarding the use of tax payment for
government and its contribution for the development of the country’s economy.

In our country payment of tax is considered by the society as a debt imposed by

government to increase the wealth of the government officials. To avoid the negative
attitude of the taxpayer a well-designed tax system is necessary. In addition, educate the
society regarding its obligation and the purpose of tax collection minimizes the wrong
attitude of the taxpayer. So, this study is designed to minimize problems that face during
assessment and collection and to minimize wrong attitudes of tax payers.

1.2 STATEMENT OF THE PROBLEM

The role of taxation in well-functioning governmental operation is so high Development
of infrastructures, basic social services institution is apparently built by government.
Moreover, the public servants, defense forces and police forces are employee of the state,
to cover these and other developmental costs the states use tax as principal source of
revenue.

The need to build speedy economic progresses and overall developmental activities call
for strong tax revenue. If no arguments in the above assertion therefore the Ethiopia
government ought to adopt sound taxation policy on collection system and in making
awareness on tax payer societies.

No doubt that the existence of better tax collection system is decisive for the existence of
well-developed and economically strong states. If no complain that better tax collection
system is decisive in one Country’s overall capacity that is the main reason motivate the
researcher to study the constraint of tax collection system with title “assessment of
problem related with tax collection in sokoru woreda.”

In the researcher study area, there are some problems of tax collection for instance in
2003 E.C the proposed amount of tax was greater than the amount that actually collected

and also some problems related with awareness and willingness of taxpayers. So in this
paper the researcher tried to or answers the following basic questions of tax collection
problems. In the woreda

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 1. What are the major bottlenecks affecting tax collection system in the
woreda?

2. What are the problems and weaknesses in the side of government bodies
(tax collectors) or the system?

3. What are the gap and weakness in the side of tax payer societies?

1.3 OBJECTIVES OF THE STUDY

1.3.1 GENERAL OBJECTIVE

The general objective of this study is to find out the major constraints that affecting the
tax collection system in the woreda.

1.3.2. SPECIFIC OBJECTIVES

Specific objective of this study focused on assessment of

 Internal factors affecting tax collection system.

 Environmental (external) factors that influencing tax collection system.

 To put some possible recommendation and to make this study’s result

base for further investigation.

1.4 SIGNIFICANCE OF THE STUDY

The researcher believe that the followings are the significance of the study

 Paved the way for improvement of tax collection system.

 Encourage compliance of tax payers

 To create fairly clear image how the tax collection and problems with tax
collection are taking place.

 Enable revenue bureau to find out whether its strategy are effective or not.

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  The result of this study will serve as a reference for further investigation

Lack of sufficient secondary data and failure of respondents to return the questionnaires
were the major limiting factors of the study.

1.5 SCOPE AND LIMITATION OF THE STUDY

Though tax is very vast and curial issue, standing its nature of study the tax policy at a
higher level is time consuming and need long term study so, this research paper restricted
only in problems of tax collection in sokoru woreda. The major limiting factors of the
study were lack of sufficient secondary data and failure of respondents to return the
questionnaires.

1.6 ORGANIZATION OF THE PAPER

This paper consists of five chapters the first chapter consists the introductory parts which
includes. Background of the study, back ground of the organization, statement of the
problem objective of the study, significance of the study scope and limitation of the
study, the second chapter consist only the literature review.

The third chapter includes the term research design. Sources of data, data collection
techniques, method of data analysis and presentation, target population and sampling
methods. Chapter four of this research deals with analysis of data that gathered from tax
payers and employees of the revenue bureau. The fifth and the end chapter of this
research deals with summary, conclusion and recommendation, questionnaires and
references that used to conduct this study.

1.7 LIMITATION OF THE STUDY

During the collection of data for this study purpose the researcher will face different
limitation, like voluntariness of the concerned people to give the information and there
was also a time constraint to do this study.

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CHAPTER TWO

2. LITERATURE REVIEW
2.1 INTRODUCTION
Taxation is a means by which governments finance their expenditure by imposing
charges on citizens and corporate entities. Government uses taxation to encourage or
discourage certain economic decisions.

Tax is a fee charged (levied) by a government on product, income, or activity tax is

levied directly on personal or corporate income, then it is a direct tax. If tax is levied on
the price of a good or services, then it is named an indirect tax. One of the most important
uses of taxes is to finance public goods and services since public goods and services
don’t allow a non-payer to be excluded, or allow exclusion by a consumer, there cannot
be a market in the good or services and so they need to be provided by the government or
quasi government agencies, which tend to finance themselves largely through taxes.
(WWW. Investor words.com)

Meaning of Tax

Taxes are burdensome thus reduce the economic welfare of individuals and businesses
(public) organization. But activities that are financed from taxes will bring benefits to
individuals or organizations, the net burden of tax then, must take the nature of
government expenditures in to account. (WWW) Business dictionary. Com)

Key Take Aways

 Taxation occurs when a government or others authorities requires that a fee be

paid by citizens and corporations, to that authority.

 The fee is involuntary, and as oppossed to other payments, not linked to any
specific services that have been or will be provided.

 Tax occurs on physical assets, including property and transaction, such as sale of
stock, or a home.

 Types of taxes include income, corporate, capital gates, property, inheritance, and
sales.

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Purpose of Taxation

According to American economist Richard Musgrave. A purpose of tax action is to

distinguish between objectives of resource allocation income redistribution and economic
stability (economic growth) or development and competitiveness listed as separate goals,
but they can generally be subsumed under the other three. The other main function of
taxation is to permit the state to provide services for the population. Infra structure and
services are what we expect from taxation (WWW.Yahoo Answers.Com).

2.2 ROLE OF TAXATION IN DEVELOPMENT STRATEGY

The role of taxation in fiscal policy and the development strategy has to be viewed in the
back ground of the function which a taxation system performs, its main function in
relation to economic development are as follows. The primary function of tax system is
to raise revenue for the government for its public expenditure. So the first foal in the
development strategy as regards taxation policy is to ensure that this function is
discharged adequately.

The second function of taxation is to reduce inequalities through a policy of redistribution

of income and wealth. Higher rate of income taxes, capital transfer taxes and wealth tax
are some means adopted for achieving these ends.

The 3rd role of taxation is for the social purposes such as discouraging certain activities
which are considered undesirable. The excise taxes on liquor and tobacco. The special
excises duties on luxury goods. Betting and gamming levy are example of such taxes.
Which apart from being lucrative revenue sources have also goals?

The 4th is to ensure economic goals through the ability of the taxation system to influence
the allocation of resources. This includes.

A. Transferring resource from the private sector to the government to

finance the public investment program.

B. To distribute the direction of private investment in to desired channels

through such measures as regulation or tax rates and the grant of tax

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 incentives etc. this inside in investment incentive to attract foreign direct
investment (FDI) into the country.

C. Influencing relative factor prices for enhanced use of labor and economic
use of the capital and foreign exchange.

The fifth function of tax action on is to increase saving and capital formation in private
sector party for borrowing by the government and partially for enhancing investment
resources within the private sector for economic development. (B.P herber, 1999)

2.3 CHARACTERS OF GOOD TAX SYSTEM

1. Tax is compulsory contribution: -it is a compulsory payment from the
person to the government without expectation of any direct returns
from it.

2. Taxes are levied by the government: -no one has the right to imposes
taxes except the government. Only the government has the right to
impose taxes and collect tax proceeds from the people.
3. Common benefit to all: - the tax collected by the government is
spending for the common benefits of all people.
4. No direct benefit: - the government compulsorily collects all types of
taxes and does not give any direct benefits to the tax payers for the
taxes paid and the tax payers cannot demand any direct benefits
against the payment of taxes.
5. Certain taxes levied for specific objectives: - though taxes are
imposed for collecting revenue for the government to meet its
expenditure on social wants and merit wants for example heavy taxes
are levied on luxury goods to reduce their consumption.
6. Attitude of the taxpayers: - the attitude of the tax payers is an
important variable determining the contents of good tax system.

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 7. Good tax system should be in harmony with national objectives: - a
good tax system should run in the same direction with important
national objectives.
8. Tax system recognizes basic report of tax payers: -a good tax system
recognizes the basic rights of tax payers. The tax payer is exacted to
pay the tax but not undergo the harassment. (Tax system manual by
Addis chamber 2004)

2.4 TAXATION PRINCIPLES

Taxation principles are basic concepts by which government is meant to be guided in

designing and implementing all equitable taxation regimes these includes.

1. Adequacy:- taxes should be just enough to generate revenue required

for provision of essential public services.

2. Broad basing:- taxes should be spread over as wide as possible

section of the population or sector of economy to minimize the
individual tax burden.

3. Compatibility- taxes should be coordinated to ensure tax neutrality

and over all objectives of good governance.

4. Convenience:- taxes should be enforced in a manner that facilitates

voluntary compliance to the maximum extent possible

5. Ear marking:- tax revenue from specific source should be dedicated

to a specific purpose only when there is a direct cost and benefit like
between the tax sources and expenditures such as use of motor fuel
tax for road maintenance.

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 6. Efficiency:- tax collection efforts should not cost an inordinately high
percentage of tax revenues.

7. Neutrality taxes should not favor only one group or sector over
another and shouldn’t be designed to interfere with or influence
individual decision making.

8. Equity:- taxes should equally burden all individuals or entities in

similar economic circumstances.

9. Predictability:- collection of taxes should reinforce their inevitability

and regularity.

10. Restricted exemptions:- tax exemptions must only be for Specific

purpose (such as to encourage investment) and for Limited period.

11. Simplicity: -tax assessments determination should be easy to Under

stand by an average tax payer. (www.Taxation dictionary.com)

2.5 CANONS OF TAXATION

Canons of taxation are the main basic principles (i.e. rules) set to build a
“Good tax system”

Canon of taxation was first originally laid down by economist Adam

smith in his famous book “the wealth of nations” in this book, Adam
smith only gave four canons of taxation. These original four canons are
now known as the “original main canons of taxation”.

As the time changed, governance expanded and became much more

complex than what it was at the Adam smith’s time soon a need was felt

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 by a modern economist to expand smith’s principles of taxation and as a
response they put forward some additional modern canons of taxation.

Adam smith gave the following four important canon of taxation

1. Canon of equity: the principles aim at providing economic justice and

social justice to the society. According to this every person should pay
depending on the ability to pay. The rich should pay higher taxes to the
government, because without the protection of the government and
authorities (police, defense etc.). They could not have earned and enjoyed
their income. A. smith argued that tax should be proportional to income.

2. Canon of certainty: according to Adam smith the tax w/c an individual has
to pay should be certain, not arbitrary. The tax payer should know in
advance how much, at what time and in what form the tax to be paid to the
government. At the same time a good tax system also ensure that the
government is also certain about the amount that will be collected by way of
tax.

3. Canon of convenience: the mode and timing of tax payment should be as

far as possible, convenient to the tax payers for example and revenue is
convenient tax located at time of harvest income tax is deducted at source.
System will encourage people to pay tax and will increase tax revenue.

4. Canon of economy: this canon implies that the administration cost of tax
collection should be minimum, i.e., the difference between the money,
which come, out of the pockets of people and that which is deposited in the
public treasury should be as small as possible. (H. (Gebrie worku
mengesha,2008)

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Additional canons of taxation by other

1. Canon of productivity: it is also known as the canon of fiscal adequacy

according to this principle, the tax system should be able to yield enough
revenue for the treasury and the government should have no need to resort to
deficit financing. This is a good principle to fellow in developing country
(economy).

2. Canon of elasticity: according to this country, every tax imposed by the

government should be elastic in nature. In other words, the income from tax
should be capable of increasing or decreasing according to the requirement
of the canary. For example, if the government needs more income at time of
crises, the tax should be capable of yielding more income through increase
in its rate.

3. Canon of flexibility: it showed be easily possible for the authorities to

revise the tax structure both with respect to its coverage and rates, to suit the
changing requirements of the economy with changing time and conditions
the tax system needs to be engaged without much difficulty. The tax system
must be flexible and not rigid.

4. Canon of simplicity: the tax system should be complicated. That makes it

difficult to understand and administer and results in problems of
interpretation and disputes

5. Canon of diversity: this principle states that the government should collect taxes
from different sources rather than concentrating on assignee source of tax. It is
not advisable for the government to depend up on single source of tax. It may
result inequality to certain section of the society, and uncertainty for the
government to raise nudes. If the tax revenue comes from diversified source, then
any rendition in tax revenue on account of any one cause is bound to be small.
(IBID).

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2.6 MAJOR TYPES OF TAXES IN ETHIOPIA
1. Direct taxes:- direct taxes are those which are paid entirely by that person whom
they are imposed. A direct tax is one paid directly to the government by the
persons on whom it is imposed. Examples include some income taxes, some
corporate taxes and transfer taxes such as estate (inheritance) tax and gift tax.

Key Take Aways

 A direct tax is paid by an individual or organaizaition to the entitiy that

levied the tax.
 Direct taxes include income taxes, property taxes, and taxes on assets.
 There are also direct taxes, such as sales taxes, where in a tax is levied on
the seller but paid by the buyer.

2. Indirect taxes:- indirect taxes are computed indirectly in the cost of goods or
service you purchase such as taxes imposed on companies for doing business. A
good example of indirect tax would be shipping cost which are included in the
cost of merchandise you buy at the store. Cost on commodities like custom
duties, sale taxes, excise taxes etc. included in types of in direct taxes. (Gebrie
worku mengesha, 2004).

1. Types of Indirect Tax

A. Employment Personal Income Tax

every person deriving income from employment is liable to pay tax on that
income at the rate specified in schedule. Employment income shall be including
any payment origins in cash or in kind received from employment by an
individual. Employees have an obligation to withhold the tax from cash payment
to an employee, and pay the tax authority the amount withhold during cash
calendar month in applying the procedure , income attributable to the month of
Nehassie and Pagume shall be aggregated and treated as the income of one
month If the tax on income from employment, instead of being deducted from
the salary or wage of the employee is paid the employer in whole or in part, the
amount so paid shall be added to the taxable income and shall be considered as
part there of (Gebrie worku Mengesha ,2008)

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 B. Business Profit Tax

This is the tax imposed on the taxable business income /net profit realized from
entrepreneurial activity. Taxable business income would be determined per tax
period on the basis of the profit and loss accounting standard corporate business
are required to pay 30% of fiat rate of business income tax. For with
incorporated or an individual business are taxed in accordance with the
determined schedule and rate. In the determination of business income subject
tax in Ethiopia, deductions would be allowed for expense incurred for the
purpose of earning, securing and maintaining that business income to the extent
that the tax payer can prove the expenses.

The following expenses calculating shall be deductible from gross income in

calculating taxable income.

 The direct cost of producing the income such as the direct cost
manufacturing, purchasing, importation, saving and such other similar
cost.

 General and administrative expense connected with the business activity.

 Premium payable on insurance directly connected with the business

activity.

 Expenses incurred on connection with the promotion of the business

inside and outside the country. Subject to the limits get by the directive
issued by the minister of revenue. (IBID)

2. Types Of Indirect Taxes

A. Turn over Tax

The turn over tax would persons not registered for value added tax render
payable on good sold and services. The rate of turn of over tax is

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  2% on good sold locally.

 For service rendered locally.

 2% on contractors, grain mills, tractors and combine harvesters.

 0-50% on other.

B. Value Added Tax

Value added tax is tax (VAT), known in most countries as a goods and services
tax (GST), is a type of tax that is assessed incrementally. It is levied on the price
of a product or service at each stage of production, distribution, or sale to the end
consumer. If the ultimate consumer is a bussiness that collects and pays to the
government VAT on its products or services, it can reclaim the tax paid. It is
simillar to, and is often compared with, a sales tax.

Value added tax is tax on consumer expenditure, it is collected on business

transactions and imports. A taxable person can be an individual firm’s company,
as long as such a person is required to be registered for VAT most of
transactions, inviolable supplies of goods or services, VAT is payable if they are:

- Supplies made in Ethiopia.

- Made by a taxable person

- Made in the course or further once of business.

- Every import of goods, other than an example import and import of

service.

The registered person is required to issue the VAT invoices to the purchaser of
goods or services up on the supply or rendering, but not later than 5 days after
the transaction. (Tax system Manual by Addis Chamber, 2004)

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 C. Excise Tax

Excise tax in Ethiopia is imposed and payable on selected goods, such as luxury
goods and on goods that are hazardous to health which are cause social
problems, so excise tax will reduce the consumption of such goods.

Rate of excise tax

The excise tax shall be paid on goods mentioned under the senedule of the
proclamation

1. when it is imported and

2. when produced locally at prescribed in the schedule

Base o computation of exercise tax

1. In respect of goods, produced locally the cost of production.

2. In respect of goods imported cost of insurance and freight (CIF)

Payment of excise tax

The excise tax shall be paid within the time pres. cribbed according to
proclamation no 307 sub article 12)

1. In respect of goods produced locally, by the producer.

2. In respect of goods imported by the importer (www.Addis chamber.eom).

Time of payment

According to the proclamation, excise tax on goods shall be paid under the
schedule.

1. When imported at the time of clearing the goods from customs Area.

2. When produced locally, not late than 30 days from the date of production.

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2.7 CLASSIFICATION OF TAXES BASED ON THEIR EFFECT ON INCOME
Taxes, based on their impact on income can be classified as progressive proportional and
regressive.

2.7.1 PROGRESSIVE TAXES

If the tax system is progressive, the proportion of income taken in tax (the tax rate) rises
with income or spending power, here as the income or spending in case, the marginal rate
of tax for the increased income or spending also rises.

It is also possible to have a progressive expenditure tax where the rate of tax rises with
increment to consumption expenditure. There is some empirical evidence that the UK
Value Added Tax (VAT) is actually progressive: people with higher incomes tend to
increase their spending on items subject to the tax to such an extent that the payment
becomes a bigger proportion of income (W. pearce; 1984, 358)

In developed countries they use a progressive income tax, for example the USA income
tax is the most progressive tax in the world Progressive taxes the most equitable than
repressive or proportional taxes in the sense that they are lived according to the ability to
pay. Some criticize progressive taxes that too much degree of progression discourages
work effort and risk taking, but some egalitarian economists and politicians tend to favors
progressive taxes.

In Ethiopia some of the progressive taxes are personal income taxes of proclamation
30/1992 and 107/1994 and the rental income taxes of proclamation 64/1993. The income
level will be categorized in different income brackets and taxed by progressive rate

2.7.2 PROPORTIONAL TAXES

This kind of tax is a tax whose rate remains constant as the size of the base increases. A
proportional tax rate is usually stared as a flat percentage of the base regardless of its
size. For example, the property tax usually operates with proportional rates, and the tax

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might be expressed as 1% of the assessed property. Sales and excise taxes, payroll taxes,
and most customs duties are also levied on the basis of proportional rates (Douglas and
Green wald; 1983; 275).

These kinds of taxes in Ethiopia are seen in the mining income tax proclamation 23/1996,
which states that both large and small – scale miners shall pay 35% of their mining
income.

2.7.3 REGRESSIVE TAXES

In these kinds of taxes, the marginal rate of tax decreased, as the income or consumption
increases. This tax a larger share of income from the low –income tax payer than from
the high-income tax payer.

A tax which is technically proportional in terms of the tax base, can often be considered
regressive in terms of tax payer’s income. Common examples of such regressive taxes are
sales taxes, excise taxes and property taxes. For example, an excise tax on cigarettes is
based on the number of cigarettes sold and thus by definition is proportional since the
number of cigarettes consume may rise as income rises, as income rises, however, the
rate of the tax decreases with increasing income and thus can be called regressive. The
effect of regressive tax is to increase inequalities of income, by placing a larger burden on
the poor than of the rich. (Green wald; 1983, 1127)

Most of the indirect taxes are regressive, for example excises and sales taxes, the same
amount of tax is paid per unit purchases. This amount of tax represents a higher
proportional of income to the poor. Some people argue that regressive taxes encourage
people to work harder to be elevated above the lower income group.

As stated in the above illustration taxes can be progressive, proportional or regressive.

They can be used for different objectives, to achieve their own goals. As Green Wald put
as a diagram the relationship between tax rates and tax base as follows.

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 progressive

Proportional

Tax rate

Regressive

Tax base

Figure 2.1: the relationship between tax rates and tax base

2.8 CATEGORIES OF TAX PAYERS

Tax payers are classified in to three major categories;

1. category “A” tax payers: - this category tax payers are include A/ any
company incorporated under the laws of Ethiopia or in a foreign country.
B/any other business having an annual turnover of birr 500,000 or above.

These category tax payers are required to submit to the tax authority, at
the end of the year.

2. Category “B” payers unless already classified in category ‘A’ any

business having on annual turnover of birr 100,000 would be classified
under category “B” tax payers. This category of tax payers should submit
to the tax authority profit and loss statement at the end of the year.

3. Category “C” tax payers: unless classified in category “A” and ‘B’ those
businesses as whose annual turnover is estimated up to birr 100,000 are
classified in category “C” of tax payers. (IBID)

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2.9 PROCEDURES OF TAX COLLECTION
Tax from category “A” and “B”, tax payer is collected based on tax payers declaration of
the annual, sales / income to the tax authority. Based on this the authorized official
approves the declaration. Following this the approved, tax is collected from tax payers
and they will be delivered receipt and clearance letter. The tax assessment for category
“C” tax payers is made based on the subjective estimation of daily sales by district
assessment committee. After the assessment was made, the committee will decide on the
daily or annual sales of the taxes payers while considering different factors which will
inters provide a basic in determining the amount to be paid by the tax payer. (Ministry of
finance and economic development Addis Ababa 1996)

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CHAPTER THREE

3. RESEARCH DESIGN AND METHODOLOGY

3.1 RESEARCH DESIGN
The study focused on the problem associated with tax collection problem in Sokuru
woreda which is found in Oromia region and Jimma Zone. The study was conducted, by
using both qualitative and quantitative research approach.

3.2 SOURCE OF DATA AND COLLECTION METHOD

To conduct this study both primary and secondary data was collected. The primary data
was collected by using questionnaires from tax payers, employees of revenues bureau and
personal interview with the manager of the bureau. The secondary data was collected
from the previous year reports of the bureau, from different books, and related published
materials.

3.3 TARGET POPULATION AND SAMPLING METHODS

There are different tax base and tax payers in the woreda such as employees, traders and
farmers. From 8000 registered tax payers in the woreda the study was conducted, on 100
registered tax payer of all sector from 18 kebeles of the woreda. Among different
sampling techniques the researcher selects simple random sampling technique. The
sample size (100) is determined by using the following formula which came from
statistics subject, as following using 90% confidence level. (Source kottari 2004)

𝐧 = 𝒁𝟐 𝒑𝒒𝒏

𝒆𝟐 (𝑵 − 𝟏)𝒁𝟐 𝑷𝑸
Where,

n = Sample size

Z2 = From table of using confidence level P = probability to be selected

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P = Probability to be selected

q = Probability not to be selected N= Total population in woreda

N= Total population in woreda

e = Error of confidence level

Therefore, the sample size of the researchers is

𝐍 = (𝟏. 𝟔)𝟐 (𝟎. 𝟓 × 𝟎. 𝟓)𝟖𝟎𝟎𝟎

(𝟎. 𝟏)𝟐 (𝟖𝟎𝟎𝟎 − 𝟏) + 𝟏. 𝟔𝟒𝟐 (𝟎. 𝟓 × 𝟎. 𝟓)

𝟓𝟑𝟕𝟗.𝟐
𝟏𝟎𝟎

3.4 DATA ANALYSIS METHOD AND PRESENTATION

After gathering all required qualitative and quantitative information data analysis was
performed and presented through table, percentage and frequencies. Then the data was
analyzed by using descriptive analysis method.

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CHAPTER FOUR

4. DATA ANALYSIS, INTERPRETATION AND PRESENTATION

This chapter deals with analysis and interpretation on the base of data gathered through
questionnaires and interview. In order to acquire information for the study totally 115
questionnaires were distributed to tax payers and employees of tax bureau. From
randomly selected 100 tax payers only 87 were correctly filled and returned the
questionnaires. From 15 employees of the revenues bureau all are correctly and actively
participated in responding the questionnaires. Furthermore, to gather additional data the
researcher was held interview with manager of the revenue bureau.

4.1 ANALYSIS OF DATA GATHERED FROM TAX PAYERS

Table 1 General Profile of tax Payers

Gender Male Female Total

No of respondents 46 41 87
Percentage 52.9% 47.1% 100%
Age group 20.30 32-41 41-50 Above Total
No of respondents 18 24 30 15 87
Percentages 20.7% 27.6% 34.5% 17.2% 100%
Educational back ground 1-6 6-12 Certificate Diploma Degre Total
e
No of respondents 35 20 14 15 7 87
Percentage 40.2% 22.9% 16.1% 12.6% 8.2% 100%

The data collected through questionnaires indicate that almost about 53% of the
respondents was male and 47% was female all respondents age lie above 20 years. The
age group from 41- 50 cover the highest ration with 34.5%. With regard to educational
bock ground 40.2% of the sampled respondents learned primary

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Schools, 22.9% secondary school, 16% have certificate, 12.6% have diploma and 8.2%
have degree

Table 2 Types of tax payers take parts in responding the questionnaires

Types of tax payers No of respondent Percentage

Employment income tax payer 15 17.2%

Business income tax payers 55 63.2%

Agricultural income tax payers 17 19.6%

Total 87 100%

From the whole respondents 63.2% are engaged in different types business, 19.6%
engaged on agricultural activity and 17.2% are public servants.

Response of tax payers

Table 3 Do you face any problem when you pay your tax liability?
Response Total No of respondent Percentage

Yes 59 67.8%

No 28 32.2%

Total 87 100%

For the above question 67.8% of the tax payer tell us that a problem when they pay their
tax liability. As the data gathered from questionnaires indicate major problems mentioned
by tax payers are in efficiency of tax collectors (by 60%), the existence of over taxation
(22.8%) and problem of procedure of tax collection with 17.2% of respondents.

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Table 4 Is your annual tax liability based on your income?

Response Total No of respondent Percentage

Yes 59 17.2%

No 72 82.8%

Total 87 100%

As tried to show in above table above 82.8% of the tax payers have complain on tax
amount imposed on them because the tax they paid is not based on their income.

Table 5 When do you pay tax?

Response Total No of Respondent Percentage
When receive assessment 14 16.5%
notification
Before due date 42 48.3%
After due date 32 35.6%
Total 87 100%

As the data gathered implies that 51.7% (16.5% + 35.6%) of the tax payers are not paid
their tax liability on time for the same question the response of revenues bureau
employees was almost nearest to this percentage with 53.3%. The late payers reason out
some problems for the late payment like of cash on hand on exact time of payment and
etc.

Table 6 Does the tax rate imposed by government is fair?

Response Total No of respondent Percentage

Yes 31 35.6%

No 56 64.4%

Total 87 100%

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From the total sampled respondents 64.4% have complain on the tax rate imposed on
them because they feel it is above their capacity

Table 7 is the payment period enough?

Response Total No of respondent Percentage

Yes 77 88.5%

No 10 11.5%

Total 87 100%

Among the respondents 88.5 of the tax payer’s answers indicate that the payment period
is enough. The remaining 11.5% say the payment period is not enough. This realizes
that range of time that given for payment is enough.

Table 8 Do you know why tax is compulsory?

Response Total No of respondent Percentage

Yes 40 45.9%

No 47 54.1%

Total 87 100%

Knowledge of tax payers about taxation is still not adequate about 54.1% of tax payers
have no idea why they pay tax. Some tax payers when ask why they pay tax they reply
that only they pay tax because it is obligatory.

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Table 9 How do you see present taxation system?
Response Total No of respondent Percentage
Good 35 40.2%
Not bad 27 31%
Need restatement 25 28.8%
Total 87 100%

From all respondents 71.2% (40.2% + 31%) almost have positive about present taxation
system and the remaining 28.8% feel not good. For the same question submitted for
employees the majority of them have good feeling.

Table 10 How do you feel about taxation?

Response Total No of respondent Percentage

As an obligation 30 34.4%

As a debt 37 42.5%

As useful 20 23.1

Total 87 100%

As indicated in above table only 23.1% of taxpayer sees taxation as useful about 76.9%
the tax payer considered tax as debt and obligation this implies that the knowledge of tax
payer is poor.

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Table 11 Are you satisfied with the method of assessment?
Response Total No of respondent Percentage

Yes 47 54.1%

No 40 45.9%

Total 87 100%

Based on the above table 45.9% of the respondents are not satisfied with the method of
assessment. The following are some of the reasons mentioned by the tax payers are the
tax system are not modernized; the appointed tax collectors are not feeling responsible or
have no interest on their position.

4.2 ANALYSIS OF DATA GATHERED FROM EMPLOYEES

This part of the analysis discussed with question that offered for the employees of
revenues bureau and their answers 15 employees of the bureau and their manger were
actively participated in answering the questionnaires and stringy assist me by giving all
necessary data for my study.

Table 12 General profile of the employees

Gender No of Percentage Educational qualification

employees
diploma Percentage
53.3

Male 9 60% Degree 46.7%

Female 6 40% M.A -
Total 15 100% Total 100%

As it is shown in the above chart the total of employees in so koru woreda revenues
bureau are only 15. 9 are males and the remaining 6 are females. Educational bank

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ground of the employees tells us that about 54.3% of them have diploma and 46.7 of the
employees graduated from college by degree.

Table 13 Do most tax payer pay their tax liability on time

Response Total No of respondents Percentage

The policy 2 13.3%

Tax payers - -
Tax office 4 26.7%
All 9 60%
Total 15 100%

Only 60% of the respondents answered that tax collection and assessment is the
responsibility of all the remaining 40% answered different answer.

Table 14 how you evaluate the coordination of your office with others

Response Total No of respondents Percentage

Excellent 2 13.4%
Very Good 3 20%
Good 5 33.3%
Hess 5 33.3%
Total 15 100%

For the question above about 66.7% of the respondents to tally answered excellent good
and very good only 33.3% said less this averagely implies us the offices coordination
with others office is good.

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Table 15 what do you think about the bureau’s structural adjustment?

Response Total No of respondents Percentage

Complete the work quickly 9 60%

Complete the work 5 33.3%

moderately

Complete the work 1 6.7%

excessively
Total 15 100%

According to data gathered from the respondents about bureaus structural adjustment
60% of the employees believe that it is good and complete the work quickly, 33.3 of
respondents feel that its

Complete the work moderately and the remaining 6.7% believe it’s complete the work
excessively.

Table 16 how you evaluate the knowledge of tax payer about taxation.

Response Total No of respondents Percentage

High - -
Medium 3 20%
Low 12 80 %
Total 15 100%

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The response of employees concerning knowledge of tax payers describe that 80% of the
respondents come out with the knowledge of tax payer is low, and the remaining 20%
respond that their knowledge is medium.

Table 17 what do you feel about the position you have assigned?

Response Total No of respondents Percentage

Is the right position 6 40%

Beyond my capacity - -
Under my capacity 9 60 %
Total 15 100%

From total employees only 40% of the employees fecal the right about their position the
majority of the respondent (60%) feels their position is under their capacity this imply
that they have no satisfaction on their position.

Table 18 what is your idea about present tax collection and Assessment system?

Response Total No of respondents Percentage

Is effective 9 60%
Show discrimination 4 26.7
Have in sufficient manpower 2 13.3%
Total 15 100%

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Among the respondents 60% of the tax payers approve that the present tax collection and
assessment system is effective 26.7% of the respondents said it shows discrimination
while the remaining 13.3% of the respondents answered have insufficient power of man.

4.3 ANALYSIS AND PRESENTATION OF SECONDARY DATA

Table 19 the five years budgeted and actual amount of tax collected in sokoru
woreda.

Year Budgeted amount of tax Actual amount of tax Percentage

collected

1999 4,ooo,ooo 4,187,552 104.65%

2000 4,448,000 5,801,536 130%

2001 5,200,000 4,925,234 94.71%

2002 5,620,265 5,024,441 89.39%

2003 6,789,000 5,322,161 78.39%

Total 26,057.265 25,260,924 96.94%

Source: Sokoru Woreda Revenues Bureau

As presented in the above table the actual amount of tax collected in 1999 and 2000 was
above budgeted tax amount with 104.68% and 130% respectively. But this result is
reversed for the next consecutive years of 2001, 2003, and 2003 with 94.71%, 89.39%
and 78.39%. The declined amount of tax collected in these three years also resulted in the
decreased amount of actual tax collected for cumulative five years from the budgeted tax
by 96.94%.

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The data gathered via interview with the manager of the revenue’s bureau indicate that
the two major factors for decreased amount of actual tax collected from the budgeted
amount of tax are:

1. The conflict aroused between Oromo and Yem ethnic groups was the major one.
As the manager explained, even after the referendum of 2001 approved Sokoru
town for Oromia, some parties who were not satisfied by the result was not paid
the tax until the last year. How ever, currently with the intervention of federal
government every thing is settled.

The other factor that understates the actual tax collected from the budgeted tax is
bankruptcy of the registered tax payers.

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CHAPTER FIVE

5. SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 SUMMARY
The major findings that included in this research summarized as follows.

In both questionnaires for employees and for tax payers to tally 55 males and 47
females were participated.

The educational background of employees of tax bureau is diploma and above.

Both employees and tax payers were agreed that the tax payment period is enough.

The tax payers are satisfied on the present tax assessment and collection system.

Knowledge of tax payers about tax is poor.

Employees of revenues bureau are not satisfied on their position and on their working
environment.

Almost the majority of tax payers are suggested that the tax rate is not fair.

The coordination of revenues bureau with other offices is good.

Lack of training and education concerning tax for employees of revenues bureau.

The major factors for diminished amount of tax collected from the budgeted are
conflict between ethnic group and bankruptcy of the registered tax payers.

The conflict of between Oromo and Yem ethnic groups are now solved by intervention
of the federal government.

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5.2 CONCLUSION
To conduct these study questionnaires were distributed for 100 tax payers and 15
questionnaires were distributed for employees of revenues bureau. In addition to this,
different opinions were collected from manager of the office and the previous year report
of the office. As the result of the study indicate that the prominent problems of tax
collection in so koru woreda are the following.

 The other significant problem identified by the study is poor knowledge of tax
payers concerning tax.
 The annual tax payment (the tax rate) imposed by government is not fair or not
comparable with their income.
 Lack of adequate training and education with respect to tax laws and amendment
of tax low which improve knowledge of employees
 The revenues bureau faced a problem in service delivery by reason of dissatisfy
employees on their position and their working environment.

5.3 RECOMMENDATION

To stamp out the distinguished problems and improve (sustain) the strength wich shown
in the woreda, with respect to tax collection and assessment, the woredas revenues bureau
should take the following measures.

 The revenues bureau should extend awareness regarding tax to the

community by using different media, flyers, and pamphlets and by face-
to-face training.

 To reduce dissatisfaction of employees on their position job rotation is one

way and the revenues bureau should try to make the working environment
attractive and comfortable by making the environment green, by providing
refreshment

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  The revenues bureau should try to smooth the way that the annual tax
payment (tax rate) and income of the tax payers become balanced. By
informing the complaint of tax payers to concerned body.

 It should necessary to create the spheres wich upgrade the knowledge of

the employees. And different training relating to tax low and amendment
of tax law must be provided.

 To reduce dissatisfaction of employees on their position job rotation is one

way and the revenues bureau should try to make the working environment
attractive and comfortable by making the environment green, by providing
refreshment

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 REFERENCES
• Ministry of finance and economic development Addis Ababa 1996.

• Gebrie Worku Mengesha (Tax accounting in Ethiopia context 2008. second

edition.)

• Ministry of revenue Addis Ababa. Dec 2003

• Ethiopia chamber of commerce. HWK partnership. Addis Ababa 8/2004.

• Encyclopedia of Americana 1997.

• Sisay Ayalew (Addis Ababa 1985).

• WWW. Business Dictionary. Com

• WWW. On line dictionary. Com.

• www.Addis chamber.com

• Sisay Ayalew (training manual on economics of taxation, Addis Ababa, 1985)

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